By Leika Kihara
TOKYO (Reuters) – The Bank of Japan is set to keep monetary policy ultra-loose on Friday but may dial back emergency pandemic-funding, less than 48 hours after the U.S. Federal Reserve signaled an imminent end to stimulus as policymakers respond to soaring global inflation.
The BOJ’s anticipated decision, underpinned by cautious optimism that the economic damage wrought by coronavirus crisis is gradually healing, will put it in line with major central banks’ moves to phase out crisis-mode policies.
However, Japan is widely expected to reduce economic relief at a much slower pace than many other nations because consumer inflation remains stuck well below its 2% target.
With slow wage growth and soft consumption shackling inflation close to 0%, Governor Haruhiko Kuroda is likely to reassure markets the BOJ will lag way behind its major counterparts in turning off the money tap, let alone raise interest rates.
“If more companies start to pass on rising costs to households, we might see core consumer inflation exceed 1.5% sometime next year,” said Mari Iwashita, chief market economist at Daiwa Securities.
“That may prod the BOJ to start dropping hints next year of future policy normalisation. But actual execution will be some time off,” she said.
At a two-day rate review ending on Friday, the BOJ is widely expected to maintain its short-term rate target at -0.1% and that for 10-year bond yields around 0%. It will also debate whether to extend a March 2022 deadline for emergency funding deployed last year to combat a pandemic-induced cash crunch.
Sources have told Reuters the BOJ may taper its corporate bond and commercial paper purchases given sharp improvements in big firms’ funding conditions.
Another funding scheme targeting smaller firms may be scaled back, too, though a portion of it could be extended beyond March to keep supporting cash-strapped retailers, the sources said.
Markets are focusing on Kuroda’s comments on the inflation outlook, and how the Federal Reserve’s signal of three rate hikes next year could affect the BOJ’s policy path.
Contrary to alarming high inflation seen in some economies, Japan’s core consumer prices rose just 0.1% in October from a year earlier as firms remain cautious about hiking prices amid stubbornly weak household spending.
Kuroda told parliament on Wednesday consumer inflation may approach 2% on rising raw material costs, though he stressed the BOJ’s resolve to keep policy ultra-loose to ensure any pick-up in price growth is accompanied by higher wages.
(Reporting by Leika Kihara; Editing by Shri Navaratnam)
